Actionable news
All posts from Actionable news

Know When To Fold (And When To Hold)

The country singer Kenny Rogers recently announced that he would retire from show business after one last concert tour. Will he go out with a bang?

He could have easily sung a line from his hit song, 1978's "The Gambler", when revealing his plans on The Today Show in September: "You have to know when to fold them". The same could be said in the case of stocks that might be getting a little too long in the tooth in your portfolio.

I've had the hold or fold dilemma myself over the last couple of years. Chevron (NYSE:CVX), McDonald's (NYSE:MCD), Wal-Mart (NYSE:WMT) and International Business Machines (NYSE:IBM) have recently underperformed, and have been underwhelming, in my otherwise fairly successful, now mostly income-producing, portfolio which includes a couple of growth stocks, a few index funds and a dozen or so individual dividend paying stocks. I asked myself "is it time to sell?" more than once.

To answer the question, I went back to my written notes (actually typed into an Excel spreadsheet which I use to monitor my portfolio) and looked over the reasons that I originally bought each stock to help make the decision.

Trouble in the oil patch

The stock of oil and gas giant Chevron was purchased as a dividend growth play. I was confident that over the long run the California-based company would steadily grow dividends generated from its successful worldwide drilling and pumping operations, liquid natural gas projects, and stable of gas stations. After all Chevron has been increasing the payouts every year for about three decades, during a few recessions and a multitude of change in the industry. Why would it stop now?

The company seemed to be doing all the right things: making investments in new projects, making its operations more efficient, and buying back lots of stock, further boosting EPS and returning more value to shareholders.

Things started falling apart last year as oil prices collapsed. Revenue and earnings plummeted. Chevron was forced to cut projects and suspend share buybacks to stop the bleeding. To keep its streak alive, it will have to increase the amount of the dividend soon or be kicked off the Dividend Aristocrats list. That probably would alienate scores of investors who depend on income growth year after year (which is one reason I think it won't...